Stop the FSA's clash of interests

THE Financial Services Authority got another mauling on Tuesday evening when a Radio 4 programme alleged that it was failing in its duty to protect consumers - one of its primary aims when it was set up by Chancellor Gordon Brown six years ago.

According to Dame Sheila Mc-Kechnie, head of the Consumers' Association - and therefore not wholly disinterested - the FSA has a cultural problem, being torn between its responsibility to consumers and its perceived responsibility to product providers.

As a result, she says, the consumer is not at the heart of its thinking and the FSA does not approach every problem from the standpoint of 'What outcome do we went for consumers?' There was, she said, a conflict at the heart of the FSA and the whole place needed a revolution from top to bottom. McKechnie has the ability to make the most reasonable person deeply irritated, but behind her bombast there is a serious point.

It is the view of many senior figures that the current regulatory structure is flawed and that it would be much more effective if the organisation were split into two distinct streams - a supervisor of the wholesale markets, which would have a light touch and be more concerned with systemic issues, and a regulator for the retail sector whose responsibility would be exclusively consumer protection.

The two strands pull both ways. For example, it makes sense to protect the stock market and financial system by introducing more intelligent measures of solvency for insurance companies to avoid them unnecessarily becoming forced sellers of equities.

But supposing one of these weaker insurers, benefiting from this change, subsequently has to cease trading, having meanwhile been allowed to continue to sell new products to unsophisticated consumers. That would no doubt be seen by McKechnie, and probably the Treasury Select Committee, as a major failure of consumer protection.

The issue might well come to a head as the summer progresses and it becomes common knowledge that precipice bonds, sold as 'safe' or 'guaranteed' high-yielding investments to a quarter of a million people, have in many cases wiped out their capital.

Far from being safe, they were in fact complex derivative products which, cutting through that complexity, were just gigantic bets that stock markets would not fall. Needless to say, they did, which is why so many of the customers will be wiped out.

The particular problem for the FSA comes with the disclosure from Christine Farnish, at the time the head of its consumer division and now at the National Association of Pension Funds, that the regulator was concerned about the marketing of these products in 1999 but still took three years to get round to issuing a public warning. It is the first real consumer scandal to have happened entirely on the FSA's watch, all the others having at least started before it got under way.

At the end of this year, the Treasury plans to look at how the FSA is working in practice. Though no one wants yet more upheaval, it should give serious thought to splitting the organisation as mentioned above into quite separate and distinct wholesale and retail regulators.

Morale question ONE OF the reasons Marks & Spencer suffered so much a few years ago was that a collapsing share price fuelled a stream of negative publicity, which so demoralised the staff that it brought about a further decline in service levels which knocked the shares even further. The business got trapped in a cycle of decline, bad publicity and more decline.

Supermarkets chain Safeway is similarly afflicted. For months it has been the target of takeover speculation, the outcome of which will not be known until the Competition Commission inquiry has run its course. Meanwhile, head office staff are expected to remain committed to the business and ignore the fact most of them may soon be out of work. However hard management tries, sustaining morale and service becomes almost impossible.

Engineering group Invensys may seem a long way from Safeway and M&S, but not in this respect. The business is to undergo a drastic slimming-down, chief executive Rick Haythornthwaite said this week. His strategy may be sound like what analysts want to hear, but it sets a ferocious management challenge.

Will staff remain motivated and committed in the face of such uncertainty? And will Haythornthwaite be given time to deliver without the constant drip of bad publicity further undermining morale?

I suspect not. But if the City is really interested in salvaging value from this business, it needs to give Haythornthwaite breathing space.

Confident ring THINGS in the market appear to be getting back to normal. On Wednesday there were two takeover approaches and there were sharp upward movements in the shares of both targets, Amey and Chubb, in the hours before the official announcements.

The day before it was the turn of Somerfield, best known as the home of the downmarket supermarket. And last week, mobile-phone operator mmo2 saw its shares rise sharply before its announcement that it has sold its loss-making Dutch business. None of these companies has a particularly thin market and in Somerfield's case, millions of shares changed hands when it takes only 75,000 to shift the price. Confidence must be returning to the markets.

But it takes a leap of faith - or perhaps that should be a leap of bad faith - to conclude from this, as one newspaper did today, that there is a full-blooded insider dealing ring at work. If there were it would be too smart to speculate on four bids in one week because that would be sure to attract attention, as indeed it has.

But news of these events did leak in advance, and someone bought the shares. Often it is the potential bidders who do this to build up a stake that defrays the cost of their bid and shows they are serious.

Even more often it happens that the share-price movement attracts the attention of other market watchers who jump in, too, not because they know what's up but because they sense something is. So a small movement quickly becomes large. It happens all the time - what makes it unusual is not that there is a ring at work but that, after months of quiet, there is at last some life in the market.